Presenting a live 90-minute webinar with interactive Q&A Preserving SBA Eligibility in Alliances With Government Contractors: Structuring Subcontracts and JVs Maximizing Business Opportunities While Avoiding Affiliation and Loss of Small Business Status TUESDAY, JANUARY 20, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: John E. McCarthy, Jr., Partner, Crowell & Moring , Washington, D.C. Amy Laderberg O'Sullivan, Partner, Crowell & Moring , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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PRESERVING SBA ELIGIBILITY IN ALLIANCES WITH GOVERNMENT CONTRACTORS: STRUCTURING SUBCONTRACTS AND JVs Amy O’Sullivan aosullivan@crowell.com John McCarthy jmccarthy@crowell.com
Agenda • The “Golden Ticket” of small business status • Small business, big risks • The affiliation “spider web” – Relationships – Layers – Related to core needs of a small business • Broad definition of control • Money matters – financing and equity interests • Spin-offs, friends, and family • Joint venture versus subcontract – When are JVs permitted – Allocation of workshare – Unique/counterintuitive requirements for JVs • Common pitfalls in agreements and proposals • New regulatory developments 6
The “Golden Ticket” of Small Business Status • Goal-driven incentive at prime level with flow-down as subcontracting plan goals • FY 13 SBA Scorecard: – $83,142,807,958 in prime awards to small businesses (23.39%) – 34% of subcontracts to small businesses • Protected space for small businesses to compete -- “set - aside” procurements • High bar to challenge agency set-aside determinations (Rule of Two) • Proposal evaluation advantages for utilization of small businesses – can be determinative factor 7
Exponential Growth – Washington Technology’s Fast 50 for 2013 Company 2008 2009 2010 2011 2012 Compound Annual Revenue Revenue Revenue Revenue Revenue Growth Rate OBXTek, Inc. $112,390 $179,134 $3,252,939 $6,323,520 $29,616,593 302.90% Zantech IT Services, Inc. $240,000 $4,390,288 $4,590,138 $17,834,495 $22,366,748 210.70% SHINE Systems & $90,624 $387,977 $1,257,517 $2,837,490 $5,857,472 183.54% Technologies $1,768,979 $31,462,826 $56,101,745 $84,689,023 $76,369,886 SAVA Workforce 156.33% Solutions LLC ERP International $527,384 $1,829,667 $4,269,605 $11,254,842 $22,332,000 155.09% Innotion Enterprises Inc. $993,079 $4,126,526 $15,043,068 $35,755,461 $41,462,734 154.20% $146,000 $198,120 $802,854 $3,555,839 $5,947,062 Rapier Solutions Inc. 152.63% $179,258 $268,357 $613,929 $5,031,837 $6,269,633 Streamline Defense LLC 143.19% $781,389 $6,846,620 $16,260,331 $21,984,172 $26,902,492 PCI Strategic 142.23% Management LLC ESAC Inc. $253,680 $615,312. $2,478,547 $4,052,923 $7,344,117 131.96% 8 8
What Is a Small Business? • No “list” of small businesses, companies self - certify, and it’s a moving target • Dramatic industry variations on “ small ” – NAICS Code: – Number of employees (50 to 1,500); or – Average annual receipts ($750K to $35.5M) • Size status must include all “ affiliates ” • Complex, changing regulatory requirements and detailed, fact-specific analysis 9
When Is Size Determined? • Size determined on date contractor submits self-certification to agency as part of initial offer that includes price • Nuances (relatively new) for multiple-award contracts – If small for contract, then small for orders, unless re- certification required for order • 8(a), SDB, HUBZone applicants must qualify as small in the primary industry classification on date application submitted to SBA and on date of SBA certification • If small when receive contract, then small for entire duration – Several exceptions such as merger, acquisition, novation – FAR re-certification requirement • Large business subs should know these rules too 10
Small Business, Big Risks • Continued crackdown on compliance and enforcement (SBA, IGs, Congress, and even the media ( i.e., MicroTech, GTSI)) • Increased regulations and reporting requirements (ensure SBs are true beneficiaries of set-aside work and SBA programs) • Heightened tension between small and large businesses in tough economy – disputes over set- aside designations and workshare • Size protest loss not limited to loss of contract – investigations, suspension, and debarment 11
Small Business, Big Risks • Small business issues are frequent problems in due diligence/ M&A • Risks relate to target’s growth as well as its business relationships • If status is not understood – red flag for other issues • Liability for false size certification can be entire value of contract; mandatory disclosure obligations • Directly impacts valuation in deal • Buyer could insist on reserves or resolution of issues prior to closing 12
“Affiliation” – The Silent Killer of Small Business Status • Generally, affiliation exists between entities when: – One controls or has power to control another – Or, a third party controls or has power to control both • “Totality of the circumstances” analysis – so EVERYTHING is on the table: – Ownership, management, previous relationships or ties to another entity – Contractual relationships – Shared office space, equipment, office support, loans, common investments, etc. • Corporate nuances – control can arise from: – Affirmative or negative control (quorum requirements, blocking rights, or supermajority voting rights) – Direct or indirect (through a third party) 13
Affiliation: The Silent Killer of Small Business Status • SBA’s Form 355 reveals additional information that could contribute to finding of affiliation, including: – “At the time of bid opening or request for assistance, have any services been performed by business for any of the alleged, acknowledged or possible affiliate or vice versa?” – “In preparing the subject bid or request for assistance, was any assistance provided by an alleged or acknowledged affiliate? – “Have there been any actual or proposed subcontracts between business and any of the alleged or acknowledged affiliates?” 14
The Affiliation Spider Web Subsidiary Parent Stockholder Family Subcontractor Small business Officer Former Officer Director Principal Stockholder Key Employee Director JV Member 15
The Affiliation Spider Web affiliate affiliate affiliate affiliate Small business affiliate affiliate affiliate affiliate affiliate affiliate affiliate 16 affiliate
How Is Affiliation Determined? • Know the provisions in 13 CFR 121.103 • Several “stand - alone” tests, with certain exceptions • “Totality of the circumstances” evidencing power to control – Case law provides guidance, but analysis is fact dependent – Focus on reality of control – substance over form • Exceptions to affiliation coverage: – Most importantly, ANCs and SBA Mentor-Protégé (soon to expand) – Variety of other narrow exceptions • Keep in mind size protest fire drill (shorter than bid protest) and be prepared! 17
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